Magazine article Economic Trends

Yield Curve and Predicted GDP Growth, August 2013

Magazine article Economic Trends

Yield Curve and Predicted GDP Growth, August 2013

Article excerpt

Covering July 20, 2013-August 16, 2013

by Joseph G. Haubrich and Margaret Jacobson

Overview of the Latest Yield Curve Figures

Highlights
                                                August  July  June
Three-monlh Treasury  bill rate (percent)         0.05  0.03  0.05
Ten-year Treasury bond rate (percent)             2.73  2.54  2.20
Yoeld QJMl slope (basispoints)                     268   251   215
PredlCtJCn fer GOP growth (percent)                1.1   0.9   0.4
Probability of recession in one year (percent)    2.23   2.6   4.4
Sources: Board of Governors of the Federal Reserve
System; author's calculations.

Over the past month, the yield curve steepened sThe yield curve has continued its recent climb, becoming even steeper as the surge in long rates far outpaced the uptick in short rates. The three-month Treasury bill increased to 0.05 percent (for the week ending August 16), above July s 0.03 percent and even with Junes 0.05 percent. The ten-year rate moved to 2.73 percent, a big skip up from Julys 2.54 percent and over a half-percent higher than June's 2.20 percent. The slope increased to 268 basis points, up from July's 251 basis points and Junes 215 basis points.

The steeper slope had a small but noticeable impact on projected future growth. Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.1 percent rate over the next year, up a bit from July's 0.9 percent and nearly triple June's 0.4 rate. The strong influence of the recent recession is still leading towards relatively low growth rates. Although the time horizons do not match exactly, the forecast comes in on the more pessimistic side of other predictions but like them, it docs show moderate growth for the year.

The slope change had a bit more impact on the probability of a recession. Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate that the expected chance of the economy being in a recession next August at 2.23 percent, down from the July estimate of 2.58 percent, and also down from June s already low 4.35 percent. So although our approach is somewhat pessimistic as regards the level of growth over the next year, it is quite optimistic about the recovery continuing.

The Yield Curve as a Predictor of Economic Growth

The slope of the yield curve--the difference between the yields on short- and long-term maturity bonds--has achieved some notoriety as a simple forecaster of economic growth. …

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